Some Remedies Exist for Bad Advice on Taxes

The Internal Revenue Service, as part of its effort to put on a friendly face this tax season, is trying to atone for bum advice that its telephone information service may dispense. But its actions may not be enough.

Like a knight in shining armor, IRS Commissioner Lawrence B. Gibbs came to taxpayers’ rescue this week when he announced that the IRS is considering waiving penalties for taxpayers who pay too little on 1987 returns because of incorrect answers from its toll-free assistance lines. The service also is looking into whether it has the legal power to waive interest on the additional taxes, Gibbs said.

To qualify for this, you probably will need to prove that the underpayment was specifically due to bad advice from the IRS. That can be done by making note of the name of the IRS telephone adviser, the date and time of call, and the question.

At first glance, Gibbs’ action--if it takes effect--could be a great relief. First, several published surveys released this week show a disturbingly high incidence of incorrect answers on complex questions. One such survey, by Money magazine, showed that IRS telephone advisers gave incorrect answers to 45 of 100 questions.

Second, the stakes for incorrect returns are higher these days because Congress has raised penalties for underpayment of taxes. For example, the penalty for late payment has risen to 1% from 0.5% of the amount owed per month. And the penalty for substantial understatement of tax has risen to 20% from 10% of the tax owed.

But Gibbs’ action may not have much practical effect. That is because, in the vast majority of cases of erroneous IRS advice, the extra tax owed is unlikely to be enough to trigger a penalty, IRS spokesman Steven Pyrek says.

Also, Gibbs’ action would still leave the problem of incorrect answers and of frequent busy signals on the IRS help line--problems that persist despite widely publicized efforts by the agency this season to boost training and add more telephone advisers and phone lines.

Also, the IRS action still would leave taxpayers with another daunting problem: incorrect or incomplete answers from accountants and other professional tax preparers.

Sidney Kess, a partner with the accounting firm of Peat Marwick Main who travels around the nation lecturing accountants on tax topics, reports that many advisers are still woefully under-informed on the new rules. And another Money magazine survey showed that, when asked to do the taxes of a hypothetical family, 50 different preparers came up with 50 different results.

Unfortunately, you are still liable for penalties and interest from mistakes made by tax preparers--even if you can clearly prove that it was the preparer’s error. “It’s your responsibility that the tax return is correct,” the IRS’ Pyrek says.

Also, Kess notes, don’t assume that your preparer will accompany you into an audit for free. Many preparers charge extra for that service, Kess says.

Here are some suggestions on how to minimize potential errors from the IRS helpers or your preparers:

- Be organized. Prepare in a logical fashion all the facts concerning your tax situation before talking to an expert. Often, erroneous answers are due partly to unclear information presented by the taxpayer.

- When talking to an IRS adviser, get his or her name first. “That might subconsciously raise their standard of care in giving you a response,” suggests Dick Poladian, partner in the Los Angeles office of the accounting firm of Arthur Andersen & Co. Also, it will be part of your proof should you get socked with penalties and interest due to erroneous advice.

- Be wary of quick answers. If the IRS adviser or your preparer responds too quickly to a complicated question, press them and reiterate the facts, Poladian suggests. “The new tax law is not that intuitive,” he says.

- Avoid inexperienced or incompetent preparers. “Just about anybody can hold out a shingle and call themselves a tax preparer,” Pyrek says, noting that no license or accreditation is required.

One sure-fire sign of a bogus or incompetent preparer: if he guarantees you a refund before even looking over your situation. Another sign: if he asks for a portion of your refund as payment for his services. Also: an office that seems temporary.

- Ask the preparer to agree to pay any penalties, and in some cases the interest as well, if his mistake results in your underpaying taxes. Many, including H&R; Block and reputable accountants, will do so. You must still pay the additional tax, however.

Any preparer who won’t at least pay the penalty for his or her own mistake “is really not a very good business person,” says Robert A. Brown, a Woodland Hills certified public accountant and past president of the Los Angeles chapter of the California Society of CPAs.

- Double-check your tax preparer’s work, and know the rules that affect your return. Several inexpensive tax guides are available in bookstores. Also, dozens of IRS booklets on various tax topics are available by calling (800) 424-FORM. One that may help is Publication 920, “Explanation of the Tax Reform Act of 1986 for Individuals.”

Or ask the IRS adviser or your tax preparer to refer you to some other authority--such as an IRS tax form or booklet--where you can verify his interpretation, Poladian suggests.

“Don’t assume that everyone who does tax returns knows taxes,” Peat Marwick Main’s Kess says, urging taxpayers to assume some responsibility for being informed.

- Ask your preparer for a written opinion on any complicated situation that could result in drastic changes on your taxes. Accountants should be willing to do this, although it may cost you in a higher fee, Kess says.

As a less costly alternative, write your preparer a letter summarizing the facts of your situation and your understanding of his advice, suggests Poladian of Arthur Andersen.

- Get a second opinion. Try out your problem on another preparer or on the IRS telephone advisers at (800) 424-1040. Perhaps, with the publicity about their wrong answers, they will work even harder to answer questions correctly.

Finally, if your preparer really botches your return, you can sue for malpractice. Many reputable preparers, where it can be shown they are clearly at fault, are willing to settle such cases and pay your interest and penalties, Kess says.